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Monday, December 8, 2014

Don't drop your bundle. It's not clear the economy has slowed to the
snail's pace a literal reading of the latest national accounts suggests.
As for the talk of a "technical income recession", it's just silly.

What
is clear is that, at best, the economy continues to grow at the sub-par
rate of about 2.5 per cent a year, a rate insufficient to stop
unemployment continuing to edge up. This has been true for more than two
years.

A literal reading of last week's national accounts from
the Bureau of Statistics says the economy - real gross domestic product -
grew by a mere 0.3 per cent in the September quarter, down from growth
of 0.5 per cent in the previous quarter and 1 per cent in the quarter
before that.

But if we've learnt anything by now, it's that it's folly to take the quarterly national accounts too literally. They're just a first stab at the truth, based on incomplete and often inaccurate data.

The
initial estimate for growth in any quarter will be revised - up and
down - up to a dozen times before the bureau is satisfied it has got it
pretty right. Reserve Bank governor Glenn Stevens referred recently to
"the vagaries of quarterly national accounting".

Frankly, I don't
believe the economy slowed markedly in the three months to September, or
the six months, for that matter. If it were true, surely we wouldn't
need to be told about it by the national accounts two months after the
fact.

Since all individual economic indicators have their
weaknesses and inaccuracies - meaning none should be taken too literally
- the only adult way to proceed is to see if the signal coming from one
key indicator fits with the overall message coming from the other
indicators.

On the basis of what all the other indicators are
saying, the forecasters - official and unofficial - expected growth in
the September quarter of 0.6 per cent or 0.7 per cent, which would be
consistent with the view we're still travelling at about 2.5 per cent a
year.

When the published figures turn out to be half that, this suggests
either that all the forecasters got something badly wrong, or that it's
the published initial estimate that's wrong and likely to be revised up
to something closer to what we expected.

The way we'll be able to
tell whether the economy really has slowed to a crawl is by watching
the rate at which unemployment rises in coming months. At the 2.5 per
cent a year speed, it's worsening at a rate averaging 0.1 percentage
points a quarter.

If that average rises, we'll know things are much worse than they were.

As
for the "technical income recession", it proves little. Make a note
that, in this context, the word "technical" is warning that what follows
is based on an arbitrary rule with little sense to it.

"Technical"
means two quarters of contraction in a row equal a recession. So one
quarter of huge contraction isn't a recession, and two negative quarters
separated by a zero quarter aren't a recession, but two consecutive
negative quarters are a recession no matter how tiny the falls (or
whether one is subsequently revised away).

"Real gross domestic
income" is real gross domestic product adjusted for the change in our
terms of trade during the quarter. Since, as we've seen, real GDP growth
was weak in the past two quarters, the deterioration in our terms of
trade in both quarters caused real income to decline by 0.3 per cent in
the June quarter and by 0.4 per cent in the September quarter.

What
happens to our terms of trade - and, hence, our aggregate income - is
important. But, in this particular case, it's hard to get too excited.

As
Dr Shane Oliver, of AMP Capital, has explained: "There is a danger in
dwelling too much on the slump in real gross domestic income flowing
from the falling terms of trade ... while swings in the mining and
energy export prices are very important for resource companies, and
hence for government revenues, their impact on the rest of the economy
is far more modest."

In other words, the main impact is on mining
company profits, and mining is about 80 per cent foreign owned. More
their problem than ours.

If I thought the economy was sliding into
genuine recession I'd say so. But I don't believe in exaggerating the
bad news because it makes for more exciting betting on financial
markets, makes a better story or because you've always hated whichever
party happens to be in power at the time.